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Supply and Demand and Peak Pricing

Recently Easyjet came under criticism for how their airfares were being priced on flights to Madrid where the Champions League final was being played June 1st.

Prices for these flights which were usually around £250, were now showing up as costing £1,000 or more.

Obviously, fans were not impressed, and voiced their concerns.

Easyjet naturally defended its position, stating that prices for flights rose due to the “enormous” demand they were experiencing and the airlines Chief Executive Johan Lundgren stated, “That is actually how the system works.”

Mr. Lundgren stated, “The whole pricing picture is very dynamic.”

“That’s how quickly this goes and this is how the system reacts.”

“I can understand if people think that the prices are high on this occasion, because it is higher than the average.”

“But there’s no doubt that this was an occasion where the prices went very high because the demand was enormous.”

In defending the company’s position, Mr. Lundgren stated during peak times, the company could fill a plane in six (6) seconds.

For fans of the clubs, options are to look at other airlines, or travel at less peak periods.

So why the increase in airfares, is Easyjet taking advantage and capitalising on the demand, yes and no.

We are seeing our old business model of “supply and demand” in a very pure and rather quick form.

Buyers vs Sellers

When “demand outstrips supply” we usually see prices for a service or product increase.

The housing market is a good example, if there are more buyers than sellers, it is a seller’s market. If there are houses for sale than buyers, it is a buyer’s market.

Plenty of properties for sale, but few buyers = buyer’s market.

Plenty of buyers but few properties for sale = sellers market.

Supply and demand.

What we are seeing in the example and model of Easyjet, is an immediate reaction to high demand, not a lagging behind the moment sort of catch-up. In the housing market supply and demand work the same, but not at such a quick, and forceful pace.

So yes, Easyjet is going to defend its position.

Another example of supply and demand being responded to immediately is taxi service Uber.

Uber operates under the same model of supply and demand. By using their application to order a taxi, the company knows immediately how busy they are, and fares react accordingly.

In high demand periods, a £10 taxi fare may double, or triple.

Riders may complain, but again, when demand outstrips supply, prices go up.

In service other related industries companies may increase their prices to slow down demand. If a tradesman is busy with 5 jobs, and if offered more jobs, they may increase their fee, or rate to do the new jobs.

Some customers will simply not pay it, which means the trades person can concentrate on the work they have, however, if a new client is willing to pay the increased rate, the trades person has additional work, and a monetary incentive to take the job.

Peak Pricing

As consumers and customers, peak pricing is another “bee in our bonnet” when we are charged a higher rate than usual.

Also termed “congestion pricing”, or “dynamic pricing”, this is where customers pay more during peak periods or periods of high demand.

This is the model used by transport services, buses and trains, and why there are peak travel hours; the hours when we all need to go to work.

Fares are higher during these periods, usually at a morning time, and at an end of work day time.

The fares drop during the day once everyone has gone to work.

Utility providers use this model as well. Ever wonder why your gas rates go up in the Fall and Winter, and drop in the Summer, when you use less gas.

If you want to go to the cinema for a film, ticket prices can be higher during certain showings and times.

Peak pricing.

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